12 Jan 2015
Fitch downgrades Russia, expects economy to contract 4% in 2015 – TDS
FXStreet (Barcelona) - The TD Securities Team note that Fitch downgraded Russia to BBB- from BBB, and further expects the economy to contract 4% in 2015 from the previous 1.5% forecast.
Key Quotes
“On Friday last week, after close of business, Fitch downgraded Russia to BBB- from BBB, and confirmed a negative outlook that was held most of 2014. The rating action was widely expected and, in this respect, it is no surprise to us or to the market. Nonetheless, it bears heavy consequences for the future.”
“First of all, the downgrade is based on the observation that the economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates."
"Fitch also added that Western sanctions continue to weigh on the economy by blocking Russian banks' and corporates' access to external capital markets, which is another grave result of Russia’s unwillingness to de-escalate the Ukrainian conflict.”
“Finally, Fitch expect the economy to contract 4% in 2015 from their previous forecast of 1.5%, on the assumption of an oil price average of $70pb this year. This is a very sharp revision, which one hardly sees unless we bring in a crisis scenario. There's clearly a huge risk here – Russia is a very concentrated economy. It strongly relies on commodities, in particular energy related. So the oil forecast is a more crucial variable to determine GDP contraction than for most other economies.”
“With oil prices in 2015 on average around $60pb or lower (they currently are below $50), Fitch’s estimates would end up on the positive side of expectations, as we may see a much more dramatic contraction in the region of 5-6% or more. Also, as Fitch highlights, we can pretty much forget about growth until 2017.”
“So start bracing for further downgrades as the Russian situation develops and risks are largely tilted to the negative side of the spectrum.”
Key Quotes
“On Friday last week, after close of business, Fitch downgraded Russia to BBB- from BBB, and confirmed a negative outlook that was held most of 2014. The rating action was widely expected and, in this respect, it is no surprise to us or to the market. Nonetheless, it bears heavy consequences for the future.”
“First of all, the downgrade is based on the observation that the economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates."
"Fitch also added that Western sanctions continue to weigh on the economy by blocking Russian banks' and corporates' access to external capital markets, which is another grave result of Russia’s unwillingness to de-escalate the Ukrainian conflict.”
“Finally, Fitch expect the economy to contract 4% in 2015 from their previous forecast of 1.5%, on the assumption of an oil price average of $70pb this year. This is a very sharp revision, which one hardly sees unless we bring in a crisis scenario. There's clearly a huge risk here – Russia is a very concentrated economy. It strongly relies on commodities, in particular energy related. So the oil forecast is a more crucial variable to determine GDP contraction than for most other economies.”
“With oil prices in 2015 on average around $60pb or lower (they currently are below $50), Fitch’s estimates would end up on the positive side of expectations, as we may see a much more dramatic contraction in the region of 5-6% or more. Also, as Fitch highlights, we can pretty much forget about growth until 2017.”
“So start bracing for further downgrades as the Russian situation develops and risks are largely tilted to the negative side of the spectrum.”